WSJ : diesel prices / feedstocks to oil refineries / which oil is in short supply / etc. ..................
ENERGY & OIL
Sept. 6, 2023
Saudi Cuts Send World Diesel Prices Soaring
European refineries have been starved of both Russian and Middle Eastern crude
By Anna Hirtenstein
One corner of the global energy market is getting especially squeezed by Saudi Arabia and Russia’s oil-production cuts: diesel.
Diesel prices have climbed more than 40% in the U.S. and Europe since May, when surprise output cuts by Saudi Arabia and some other members of the OPEC+ oil cartel took effect, Argus data showed. Most actively traded futures prices for Brent crude and West Texas Intermediate, the benchmarks for crude oil, are up 13% and 14% in the same time frame.
The run-up is translating into higher pump prices and trucking costs in the U.S. and elsewhere in the West. It reflects the fact that heavier kinds of oil are better suited to making diesel, while others, such as lighter U.S. crude, are more readily turned into gasoline.
In the U.S., while the national average price for unleaded gasoline added 7 cents a gallon in August, according to AAA, the cost of diesel rose by 42 cents a gallon.
“Diesel is more heavily affected because of the type of crude that’s being taken out of the market,” said Alan Gelder, vice president for refining, chemicals and oil markets in Wood Mackenzie’s commodities research business. “Saudi’s oil provides a higher yield for diesel than lighter crude oils. This loss adds further cost to the economy.”
Saudi Arabia said Tuesday that it will extend its current cut of one million barrels of oil a day through to year-end. Traders and analysts had widely anticipated that the policy would last through to October, so the longer time frame surprised the market. Russia’s deputy prime minister, Alexander Novak, said Russia will also keep its 300,000 barrel-a-day output cut through the end of 2023.
Europe is hardest hit because its refineries were designed to process a steady stream of Russian feedstocks. But these supplies have largely wound down because of sanctions in the wake of the Ukraine invasion.
Russia’s medium-sour crude is similar to oil from the Middle East, meaning Saudi oil has commonly been used as a replacement, analysts say. The kingdom’s output cuts have made this type of crude harder to obtain.
“Europe has had more than a year to get used to this situation with Russia and for natural gas, it has adapted. But this diesel issue hasn’t been solved,” said Bjarne Schieldrop, chief commodities analyst at SEB. “And this issue is spilling into diesel markets everywhere.”
Shell operates Europe’s largest refinery in Rotterdam, the Netherlands. The Pernis facility used to churn out large quantities of diesel made with Russian feedstocks. After the Ukraine invasion, it turned to Saudi sour crude as its main input for this product. Now, it is buying more U.S. crude and producing less diesel.
Prices for sour crude have risen, with the Dubai benchmark recently at a 10-month high. Heavier, sour oils are typically cheaper because they are harder and more expensive to refine, but prices have overtaken those of lighter, sweeter crudes. They recently traded at the widest premium in over a year, Argus data showed.
Diesel has become one of the biggest trades in energy markets. Leveraged funds, or investors that trade using borrowed money, recently amassed the largest net long position in 22 months in heating-oil futures, one derivative of diesel, Commodity Futures Trading Commission data showed.
But the surge is bad news for consumers. Diesel powers trucks and trains that transport goods to end users. Higher fuel costs can feed into elevated prices in stores, as companies pass them along to consumers.
“It’s used in the delivery of everything in the last mile. High diesel prices mean delivery costs to supermarkets and other shops are high. It makes inflation more sticky,” said Wood Mackenzie’s Gelder. Diesel is also commonly used to power agricultural and industrial machinery.
About 42% of European Union cars run on diesel, according to the European Automobile Manufacturers’ Association, so higher prices also hit many consumers directly.
Some analysts are concerned that diesel prices could increase sharply during the colder months, particularly if China repeats last winter’s curbs on exports of oil products.
-- Bob Henderson contributed to this article.
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